6 Beverage Stocks to Watch

NEW YORK ( TheStreet) - Latest statistics from the Brewers Association show that 1,759 new breweries were opened in 2010, placing every American within 10 miles of a brewery. The number of breweries increased to 1,790 by July 2011, excluding the 725 breweries in the planning stage. The study reveals that brewery startups in the U.S. have been growing rapidly, stealing profits from big-ticket breweries and providing more access to craft beer for mug tippers coast-to-coast.

The global spirits industry will continue to grow with India and China expected to be the two fastest-growing markets for spirits globally, according to the International Wine & Spirit Research forecast report 2010 to 2015. Additionally, India will overtake Russia to become the second-largest spirits market in 2013, at least on registered, taxed sales. The U.S. market is forecast to be the third fastest-growing market worldwide until 2015.

As per the Scotch Whisky Association, shipments of whisky from Scotland soared 19% for the first six months of 2011, reversing its declining trend in the previous year. This includes countries like Singapore and Brazil, which bought more bottles of the spirit. The value of exports was up 22% to $2.9 billion, topping the 10% growth recorded in 2010.

Based on a strong industry outlook, latest quarterly results and analysts' recommendations, these eight beverage stocks have potential upsides ranging from 9% to 64%. On average, these stocks have a buy recommendation of 45% and a hold rating of 45%, based on a Bloomberg consensus.

These stocks are listed in ascending order of upside potential.

6. Brown-Forman ( BF.B) makes a variety of alcoholic beverages. Its principal brand is Jack Daniel's, and the others are Finlandia, Southern Comfort, Canadian Mist and el Jimador.

For the first quarter of fiscal year 2012, the company reported net sales of $840 million, an increase of 13% from the year-ago quarter. Net income for the quarter increased to $118.1 million, or 81 cents per share, from $111.4 million, or 76 cents per share in the year-ago quarter. Cash and cash equivalents at the end of the quarter more than doubled to $552.5 million from $260.8 million in the same period prior year.

The company said its sales growth in international markets modestly exceeded U.S. growth during the quarter. The U.S. business was driven by continued growth of the Jack Daniel's trademark and super-premium brands, as well as the launch of Jack Daniel's Tennessee Honey. The Jack Daniel family recorded sales growth of 24% over the year-ago quarter, while the Finlandia Family posted 11% growth.

For full fiscal year 2012, the company has reaffirmed its earnings per share guidance to be in the range of $3.45 to $3.85. It estimates underlying operating income growth in the mid-to-high single digits for the year. Additionally, it expects the underlying net sales growth trends to continue and benefit from broad-based sales growth through its portfolio development and geographic expansion.

Of the 11 analysts covering the stock, 27% recommend a buy and 55% suggest a hold. Data from Bloomberg has analysts forecasting the stock gaining 8.6% to $72.38 in the upcoming 12 months.

5. Diageo ( DEO) engages in the beverage business with a collection of international brands in branded premium spirits, beer and wine. The company's range of premium brands that it produces and distributes includes Smirnoff vodka, Johnnie Walker scotch whisky, Baileys Original Irish Cream liqueur, Captain Morgan rum, J&B scotch whisky, Tanqueray gin and Guinness stout.

For 2011 fiscal year ended June 30, the company posted a 17% increase in its net profit to $3 billion from $2.57 billion in the previous year, led by significant demand from emerging markets. Excluding acquisitions, disposals and currency effects, sales were up 5% to $15.7 billion. Gross margin expanded 70 basis points. Earnings per share increased to $1.32 from $1.14 in the previous year.

Diageo declared full-year dividend of 64 cents, up 6% year-on-year. Return on invested capital for the year expanded 110 basis points to 15.9%. Looking ahead, the company targets medium-term annual sales growth of 6% with an improvement in the margin and a double-digit percent earnings growth. The company plans to cut costs by $126.4 million by June 2013.

Recently, the company said it plans to invest $9.5 million in a state-of-the-art bioenergy plant at its Glenlossie distillery complex in Speyside. The distillery will use around 30,000 tons of draff per year, the by-product from around 12 million liters of Scotch whisky production. It also closed its public offer to acquire an additional 5.07% stake in Hanoi Liquor Joint Stock Company in Vietnam for almost $10.11 million. Diageo's Ghanaian unit received approval from the nation's capital market regulator to raise $45 million by selling stock to shareholders to pay debt and to invest in infrastructure.

Of the six analysts covering the stock, four recommend a buy and the rest rate a hold. The stock has no sell ratings. Data from Bloomberg has analysts forecasting the stock gaining 14.2% to $86.41 over the next 12 months.

4. The Boston Beer Company ( SAM), a craft brewer in the U.S., produces malt and hard cider beverages at its breweries and under contract arrangements at other brewery facilities.

For the second quarter 2011, the company recorded net revenue of $134 million, an increase of $4.4 million over the same period in 2010, led by shipment volume gains. Core product depletions during the quarter grew 7% for the same period. Net income for the quarter increased to $28 million, or $2.01 per share, from $16.3 million, or $1.13 per share in year-ago quarter.

As per the Brewers Association, sales for the first half of 2011 increased 15% with a 14% growth in volumes to 5.1 million barrels from 12% sales growth and 9% volume increase in the first half of previous year, respectively. As per the association study, America's beer drinkers are rapidly switching to craft because of the variety of flavors.

For 2011, the company estimates earnings per diluted shares to be in the range of $3.20 and $3.60. It estimates depletion growth of 7% to 8%, and shipment growth of 6% to 7%. For the second half of 2011 or early 2012, SAM is seeking opportunities for price increases as it expects significant cost pressure from the 2011 barley crop. Capital expenditure for full year is expected between $15 and $25 million for continued investments in the company's breweries and additional keg purchases.

Of the six analysts covering the stock, two recommend a buy and three rate a hold. Analysts surveyed by Bloomberg expect the stock to gain an average 14.3% to $89.30 over the next 12 months.

3. Molson Coors Brewing Company ( TAP), a holding company, has a diverse portfolio of owned and partner brands, including signature brands Coors Light, Molson Canadian and Carling. Its operating segments include Canada, the U.S., U.K. and Molson Coors International.

For the second quarter of 2011, the company recorded net sales of $933.6 million, an increase of 5.7% from the year-ago quarter. Underlying net income, excluding special items, increased 2.6% to $399.8 million, led by positive pricing, a favorable brand mix and continued strong cost management. Total net producer revenue per barrel, including contract brewing and company-owned distributor sales increased 3.5%. For the second quarter, synergy savings of almost $18 million were generated, including savings in procurement, corporate services and brewing materials.

Recently, Molson launched new brand identities for its Worthington's and Caffrey's ale brands as it seeks to strengthen its market share. The brand director for the products said that the ale category is showing signs of growth for the first time in over a decade, and Worthington is ideally placed to challenge the sector. He added that the brand Caffrey possesses a latent energy that could be reinvigorated.

Of the 12 analysts covering the stock, 33% recommend a buy and 58% rate a hold. Data from Bloomberg has analysts forecasting the stock gaining 17.4% to $48.57 in the upcoming 12 months.

2. Anheuser-Busch InBev ( BUD), a brewing company, produces, markets, distributes and sells a balanced portfolio of approximately 200 beer brands. A few of these brands include global flagship brands Budweiser, Stella Artois and Beck's; multi-country brands such as Leffe and Hoegaarden, and many local champions. It also makes soft drinks, particularly in Latin America.

For the second quarter of 2011, the company recorded revenue of $9.9 million, an increase of 3.7% from the year-ago quarter. Total volume for the quarter was up 0.3%. Focus Brand volumes increased 2.3% for the quarter. Normalized profit attributable to the company's equity holders increased 11.3% to $1.6 billion, or $1 per share from the year-ago period.

With a delivery of $70 million in Anheuser-Busch integration synergies, the company is on track to deliver at least $270 million in synergies for full-year 2011. Capital expenditure for the year is estimated at $3.1 billion, primarily for building capacity to meet demand growth in key markets like Brazil and China, and to drive the commercial innovation pipeline.

The company recently revealed that it is partnering with label maker Spear to introduce a new customizable beer label. As per this deal, Spear has developed an interactive label for Anheuser-Busch's best-selling beer, Bud Light. Customers can change the label on each bottle by using a coin or key to write a message or to draw an image.

Of the 10 analysts covering the stock, nine recommend a buy and one rates a hold. There are no sell ratings on the stock. Analysts polled by Bloomberg expect the stock to gain an average 34.6% to $66.71 over the next 12 months.

1. Central European Distribution Corporation ( CEDC), a primary operator in the alcohol beverage industry, produces vodka and is Central and Eastern Europe's integrated spirit beverages business. With operations in Poland, Russia and Hungary, it produces and sells its own brands (principally vodka), and imports of a range of liquors, wines and beers.

For the second quarter of 2011, the company recorded net sales of $212 million as compared to $175.6 million in the same quarter prior year. On a GAAP basis, net profit for the quarter stood at $3 million or 4 cents per fully diluted share, vs. net loss of $70.1 million, or $1 per share in the same quarter last year.

The company's board of directors recently adopted a Rights Agreement in which one preferred stock purchase right will be distributed as dividend on each common share held of record as of close of business on Sept. 19.

For fiscal 2011, the company has updated its net sales guidance range to be $900 million to $1.05 billion from the previous view of $880 million to $1.08 billion. Meanwhile, fully diluted earnings per share are seen in the range of 80 cents to $1.00 from the earlier guidance of $1.05 to $1.25.

Of the 18 analysts covering the stock, 22% recommend a buy and 61% suggest a hold. Analysts polled by Bloomberg foresee the stock gaining an average 63.6% to $10.22 over the next 12 months.

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